Internet sales tax

Keeping up with emerging technology creates challenges at many levels – from individuals struggling to understand new tools and use them effectively to businesses implementing new practices that employ the latest technologies to public entities applying regulations to those technologies. It is an evolutionary process that requires revision and expansion of practice and policy. A vexing example of this is how online purchases are taxed. From a policy-fairness perspective, a law under consideration in Congress would be an improvement.

The Marketplace Fairness Act is gaining momentum in the U.S. Senate, and if it is approved the measure would allow states and localities to more easily collect sales tax from online merchants that may not have a bricks-and-mortar presence in a given location. It is estimated that the measure could help collect up to $24 billion in state and local sales-tax revenue currently not levied on Internet purchases. Doing so would extend sales-tax requirements currently imposed on state and local merchants to those with a more ethereal nature, thereby making those tax rules consistent across the retail board.

The measure would not come without its share of implementation nightmares, however. Under the act, states and localities would be required to provide software to affected merchants, free of charge, that calculates the sales taxes associated with a particular purchase. Critics say that could mean up to 9,000 different taxing menus – no small undertaking for any merchant, regardless of size. There is a bit of breathing room, though, with an exemption for those sellers, based in another state, whose online business in a given state is less than $1 million. Getting the structure off the ground will be significant, but the results will be positive for state and local tax coffers, as well as for consistency in tax policy.

Supporters of the measure say it will be an equalizer for local businesses that cannot compete with large online retailers and are put at a greater disadvantage because they must collect sales taxes while their Web competitors do not. Whether the expanded taxing requirements will boost competition is uncertain and, ultimately, the wrong question to ask when considering sales-tax policy. Instead, lawmakers would best contribute to the debate by asking whether the measure is fair to all involved and in keeping with the intent and practical application of existing sales tax policies. By that measure, it seems the Marketplace Fairness Act is well-conceived legislation.

There is no reason that businesses conducting sales through emerging technology not considered when sales-tax laws were written should be exempt from those laws. It takes time for the regulatory environment to catch up to the changing technology, and with a relatively well-established Internet shopping environment, the time is ripe for that policy evolution to take place. With a 74-20 vote to debate the measure, the Senate is positioned to take action on the Marketplace Fairness Act, and President Obama has indicated his support for the measure. How the bill will fare in the U.S. House of Representatives is an open question, given the divergent interparty positions on the measure, but the debate is an important one and action is appropriate.